Business Restructuring Relief for Corporate Tax Purposes in UAE
Businesses often make significant changes during their operations for various reasons, such as financial improvements, operational restructuring, or ownership transfers. Recognizing the need to accommodate such restructuring, the UAE Corporate Tax Law offers tax reliefs to restructured businesses, allowing them to calculate taxable income more favorably. This article highlights the available tax reliefs under the UAE Corporate Tax Law for restructured businesses. Therefore, it is advisable for Taxable Persons to consult Corporate Tax UAE Consultants to avail tax relief in compliance with the Corporate Tax Law.
Calculation of Taxable Income for Restructured Businesses
As per the Corporate Tax Law in UAE, taxable income calculations for a restructured business can exclude any gains or losses under the following conditions:
- Transferring an independent part of the business to another taxable person, resulting in their becoming a taxable person.
- Transferring the entire business to another taxable person, who acquires the business in exchange for shares or ownership interest, leading to the transferor(s) ceasing to exist.
Conditions to qualify for Corporate Tax Relief in UAE
To qualify for tax relief as a restructured entity under the UAE Corporate Tax Law, the following conditions must be met:
- The transferee must comply with all applicable UAE federal and/or emirate-level laws and regulations governing restructuring transactions to benefit from tax relief.
- Both the transferee and transferor must be resident persons, or if non-resident persons, the taxable non-income person must have a permanent establishment in the UAE.
- Neither the transferee nor the transferor can be exempt persons for corporate tax purposes under the UAE Corporate Tax Law.
- Both the transferee and transferor must not be Qualifying Free Zone Persons unless they have chosen to be subject to corporate tax at the rates specified under the Corporate Tax Law.
- Both taxable persons must have the same financial year-end.
- Both taxable persons must use the same accounting method for preparing financial statements.
- The transfer must have valid commercial or non-fiscal reasons reflecting economic reality as its objectives.
- Requirements Imposed by UAE Corporate Tax Law on Restructured Businesses to Claim Tax Relief
Requirements to ensure compliance when applying for Tax Relief
When applying for tax relief for restructuring a business, the Taxable Person must adhere to the following:
- Assets and liabilities should be transferred at their net book value during the transfer to avoid gains or losses.
- The value of the shares or ownership interest received must not exceed the net book value of the transferred assets and assumed liabilities, less the value of any other consideration received.
- The value of the shares or ownership interest surrendered must not be less than the book value of the shares or ownership interest received, less the value of any other consideration received.
- Any unutilized tax losses incurred by the transferor before the completion of the transfer can be carried forward as tax losses of the transferee, subject to the Minister's recommendation. For transfers involving an independent part of the business, only unutilized tax losses can be applied to the transferred part.
Whereas, Tax Relief for restructuring is applicable when:
- The shares or ownership interest transferred are received by a third party, not the transferor taxable person.
- The shares or ownership interest are issued or transferred by a third party, not the transferee taxable person.
- The shares or ownership interest are not received by a taxable partner in an unincorporated partnership.
- These conditions indicate that, under Corporate Tax Law in UAE, a third party must be involved as the recipient or issuer of the transfer's right or consideration, while all other conditions under the law must also be met.
For partial business transfers, tax relief only applies to unutilized tax losses related to the transfer of the independent part of the business.
Time Limit and Restrictions for Tax Relief
For corporate tax purposes, all parties involved must comply with the tax relief conditions for a minimum of two years. This requirement ensures that the tax relief for business restructuring applies specifically to such transactions and not to ordinary sale transactions aimed solely at achieving a tax-neutral transfer of assets and liabilities.
Consult Tax Consultants in UAE
The transfer of shares or ownership interest in the transferor or transferee to a person outside the Qualifying Group is restricted within two years of the initial transfer. Any subsequent transfer of an independent part or the entire business within the first two years of utilizing business restructuring tax relief is prohibited under Corporate Tax Law in UAE. If such a transfer occurs in violation of these restrictions, the transfer is deemed to have taken place at the market value on the date of transfer. The taxable income is adjusted accordingly, reflecting the tax losses of the involved taxable persons. Therefore, to avail tax relief in compliance with the Corporate Tax Law, Taxable Persons are advised to consult Tax Consultants in UAE. Thus, contact us today and we shall be glad to assist you.
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